UK Monthly GDP stumbles in more ways than one

This morning the UK received some disappointing economic news as the Office for National Statistics released this.

For July 2023, monthly real gross domestic product (GDP) is estimated to have fallen by 0.5%, with falls in all three main sectors, following growth of 0.5% in June 2023.

It is not the decline per se that is the issue as there had been warning signs, but the size of the decline. Also I have long warned that this is an erratic series and a bad idea and I think that swinging from 0.5% up to 0.5% down rather eloquently makes the point. If that does not then since last December we have gone -0.5% then 0.5% then 0.1%, then -0.3% then 0.2% then -0.1% followed by 0.5% up and then down. Make it make sense!

If we now switch to the ersatz quarterly figures we see a much more stable situation.

Looking over a broader picture, GDP showed 0.2% growth in the three months to July 2023 when compared with the three months to April 2023. Production grew by 0.6% and was the main contributing sector to the three-month growth. Services and construction output also increased in the three months to July, both by 0.1%.

There are at least consistent and hopefully avoid some of the wild swings of the monthly series. Part of that is we will have more data on the earlier months in the series as the latest numbers only have around 60% of the final data.

However the annual comparison does get rather blown up.

Monthly GDP showed no growth in July 2023 compared with the same month last year. For comparison, monthly GDP grew by 0.9% between June 2022 and June 2023.

Part of the issue here is what we might call a Royal problem and perhaps our own fault for having a monarchy.

The Platinum Jubilee in 2022, and the move of the May bank holiday, led to an additional working day in May 2022 and two fewer working days in June 2022. It should also be noted that May 2023, saw one fewer working day as there was an additional bank holiday for the coronation of King Charles III.

These have affected the numbers but in truth there are also other issues with the reliability of the monthly series.

What about July?

We see an immediate issue as we look at our largest economic sector.

Services output fell by 0.5% in July 2023, following growth of 0.2% in June 2023

It very quickly becomes a case of “hello darkness my old friend” as we see this.

The main contributor to the fall in monthly services output was the human health and social work activities sub-sector, which fell by 2.1% in July 2023. This was attributed entirely to a 3.4% fall in the human health activities industry.

Although this time around it was not a consequence of the Covid response.

Industrial action was held in July by NHS senior doctors (two days) and radiographers (two days) for the first time while industrial action by junior doctors increased (five days in July, compared with three in June).

Or at least not directly as we do see the new methodology in play.

 NHS England reported that 65,557 appointments and procedures were cancelled because of the senior doctors strike and 101,977 acute inpatient and outpatient appointments were cancelled because of the industrial action by junior doctors.

The counting of appointments is rather messy, although presumably there would have been a fall under the old GDP system as you do not get paid when on strike.

The next largest faller was information and communication and we do observe quite a wild swing in the main mover and shaker here.

Computer programming, consultancy and related activities was the largest contributing industry, falling by 3.4% in July after three consecutive monthly growths in April, May, and June 2023.

That looks odd but the next one seems more consistent with the changes we looked at in the labour market figures yesterday.

Administrative and support service activities also fell in July 2023, by 1.4%. The largest industry within this sub-sector was employment activities, which fell by 2.3% in July after a growth of 2.1% in June. This industry has had a decrease in monthly output in 9 of the last 12 months.

There is another “hello darkness my old friend” moment. But again it is the strikes.

Education also fell in July 2023, by 1.1%, where the sector saw two days of industrial action in England at the start of the month.

Although this is a bit of a gem.

Please note that education attendance is considered to be constant over the school year, so summer holidays and school leavers did not reduce the estimate of education output in July 2023.

What could go wrong?

Finally there were some positives. But we see some especially wild swings here.

The main offsetting positive contribution was from the arts, entertainment and recreation sub-sector, which grew by 6.6% in July 2023; this was its largest growth since May 2021. Sports activities and amusement and recreation activities grew by 12.4% and creative, arts and entertainment grew by 4.9%.

Production

We see a not dissimilar pattern here.

Production output fell by 0.7% in July 2023, following growth of 1.8% in June 2023 (Figure 4). The largest falling sub-sector was manufacturing, which fell by 0.8% in July 2023.

Manufacturing saw a particularly wide gap with June.

This follows growth of 2.4% in June 2023, the strongest monthly growth since November 2020,

Frankly even allowing for the Bank Holiday impact that looks messy. Indeed our regular swing factor which is pharmaceuticals – for newer readers that industry does not operate on a monthly pattern and is erratic – does not merit a mention in spite of it reducing manufacturing output by 0.16% in July.

Construction

By the standards here this is not a large swing.

Monthly construction output is estimated to have decreased 0.5% in volume terms in July 2023. This follows a 1.6% increase in June 2023,

The Weather

It often gets the blame for weak economic data and it was quoted in the construction release. We can take that wider.

The July ( Met Office) report mentioned “the UK overall rainfall total was 170% of average overall, making this provisionally the wettest July since 2009 and sixth wettest July in the series”. The wet weather was cited as a reason for lower output in retail, as described in our Retail sales bulletin, and also in construction and outdoor accommodation venues.

To be fair the June release did mention that it was probably boosted by the better weather we saw then. So this bit is at least balanced and consistent.

Comment

The monthly GDP series is proving to be what one might call challenging. In impolite company one might call it much worse. I thought I would take a look at what I wrote last month.

Caution is required with taking monthly numbers too literally due to the error range but this time around I think that they are less than the bank holiday impact on the quarterly numbers. I have seen estimates of that being between 0.5% and 0.6% in the past. Personally I think it is not that large but if we halve it then it is material.

Apologies for the clunky English, but I think that holds up on that June allowing for Bank Holidays was perhaps 0.2%. If we add the subtracted element to July it becomes -0.2%. All very back of the envelope but it feels more sensible than what the official series has done.

Switching to the quarterly series then we are in the same position of having growth but not much (0.2%). Since then there has been a change following the Blue Book revisions which in a further muddying of the waters the ONS has ignored today. So again using a back of the envelope calculation the UK economy was 0.8% larger than pre pandemic in July.

 

 

 

What caused the large upwards GDP revision for the UK?

As Friday developed and we moved into the weekend it was clear that there had been quite a sea change in the reported performance of the UK economy. There are a whole litany of consequences from this as so much “expert” analysis is now today’s chip paper. I thought it was put well here.

I am a big fan of recent improvements but as
@ChrisGiles_ has flagged this AM the entire UK economic narrative – post pandemic – has just been revised away. Every “UK not back at pre-CV-19 level” headline now obsolete. “UK bottom of the G7” no longer true. Extraordinary. ( @shjfrench)

Of course well might Chris Giles be mulling such headlines as he wrote so many of them. But to be fair he also reported this news promptly which far from everyone did as for example I found myself chasing the BBC. Simon French also continued.

Now it is possible, as ONS note, that similar revisions will happen across G7 & UK is first out of the traps. But as macro guy who has had to talk to international investors why Gilts/ UK equities do/dont deserve a discount, this has cast huge doubt on recent investor conclusions.

Actually the US was first to do this and those who have followed my work on the measurement of GDP in health and education will know we had particular issues suggesting the UK was different.But there is a main point here and let us start with the scale of what David Bowie would call ch-ch-changes.

The GDP Numbers

We can start with the impact of the pandemic on GDP.

In 2020, average volume GDP is now estimated to have fallen by 10.4%, revised up by 0.6 percentage points.. This upward revision reflects both updated data and methods changes. Measurement of inventories is challenging over this time period; the changes in the inventories component is now estimated to have increased by £2.5bn in 2020 (previously this was a £11.4bn fall).

As you can see there has been a large change in inventories or rather the reporting of them. In the modern IT era we should surely know inventories

Next up is the rebound which was much more elastic than previously thought.

In 2021, average volume GDP is now estimated to have increased by 8.7%, revised up from a previous estimate of 7.6%

This is more of a step change because the initial fall in a recession is usually reduced over time albeit the 2020 was larger than usual but the rebound was much stronger than revisions usually show. So time for Marvin Gaye.

Oh, what’s going on
What’s going on
Ya, what’s going on
Ah, what’s going on

The official version is below.

Alongside confronting the three approaches to measuring GDP for the first time through the supply and use table (SUT) framework, we have also incorporated richer data across a number of GDP components. For example, in the expenditure approach, household consumption sees upwards revisions in 2021 because of better information available on areas such as Telecoms.

There are two clear areas that I have highlighted over the years. Firstly the fact that you can gain extra information from the other 2 GDP measures as for example expenditure explicitly includes trade and income is often more timely. I realise many are taught at school and indeed university that net trade is in GDP when it is more complex than that. Secondly we looked at the Deflator and inflation issue in Telecoms where my argument that the price falls ( in that period were 90%) were both disinflationary and a boost to GDP. I rather suspect “better information” is in fact coming round to my point of view that these things can create economic growth.

What does this mean?

We are back to the destruction of so much expert analysis.

Upward revisions to annual volume GDP growth in 2020 and 2021 mean that GDP is now estimated to be 0.6% above pre-coronavirus (COVID-19) pandemic levels in Quarter 4 (Oct to Dec) 2021; previously this was estimated as 1.2% below.

For example here is something from someone who has talked the UK economy down.

“The fact that the UK recovered from the pandemic much faster than thought shows that once again those determined to talk down the British economy have been proved wrong,” said Chancellor Jeremy Hunt, ( Financial Times)

His whole budget strategy was based on that in another misfire for him. But I am thinking more of places like the Office for Budget Responsibility and the Bank of England. The productivity crisis and indeed the claimed labour supply issue just changed in terms of them being specific UK problems as their “expert” analysis supposedly showed.

It is hard not to have a wry smile at this bit from the Financial Times though. Have they forgotten that their stock view is that the UK will not grow ( or worse)?

That will add the equivalent of two years of current UK growth to the country’s gross domestic product.

The GDP Deflator

I have been arguing since August 2020 that there has been something big going on here and it has been UK specific.

https://notayesmanseconomics.wordpress.com/2020/08/12/has-nobody-else-spotted-6-inflation-being-reported-in-uk-gdp/

For those new to the situation there was a warning as at a time when we were being told there was no inflation suddenly we had a recording of 6% which involved readings of over 30% in the areas in question. These were health and education and let me hand you over to last year’s Blue Book.

Movements in the implied GDP deflator in 2020 and 2021 have been largely affected by the government consumption deflator.

So they caught up to my point or rather were forced to admit it. Which meant this.

In 2020, the volume of government activity fell, for example, health and education in response to the coronavirus pandemic. At the same time, government expenditure increased in nominal terms……This led to a very large increase in the implied price of GDP in 2020, which then unwound in 2021 from this higher level.

We are back to the way you measure GDP as the UK switched to the output version for health and education rather than income. Then the pandemic hit which when dentistry stopped for example that meant UK GDP for this area was zero whereas elsewhere it changed little as state dentists were still paid. In essence the Deflator took the strain as our statisicians tried to recover reality. So I had a wry smile as I read this on Friday from them.

In 2020 the average gross domestic product (GDP) implied deflator growth is 5.1%, downwardly revised 0.8 percentage points. This is influenced by upward volume revisions in 2020.

There is less of an apparent influence in 2021 but you see if you take the view that something is embarrassing then the standard bureaucratic response is to obscure it. That thought was on my mind as I read this.

 Blue Book 2023 will enhance the quality of deflators used by:

• introducing new methods to account for changes in the quality of computer hardware
• expanding the use of Services Producer Price Indices (SPPI) in National Accounts
• introducing new weighting methods for market output deflators
• introducing improved methods and data sources to estimate trade in services’ travel deflators

If say we were discussing a naval battle that would be quite an effective smokescreen wouldn’t it?

Comment

There are lots of contexts to this. Many of you have pointed out that the UK economy seems to be doing well in your experience and it now turns out that it is a case of anecdotes 1 official statistics 0. Next up is the issue of taking care with ch-ch-changes and as so often David Bowie was ahead of his time.

Ch-ch-changes
Where’s your shame?
You’ve left us up to our necks in it

Or as @BillWells_1 kindly pointed out.

@notayesmansecon Is exactly right to identify UK’s decision to use (just) the output GDP version for health & education. A caricature of effect of this decision is that you measure the number of operations and not include in GDP the ‘hotel services’ in hospitals.

Of course the corollary of my initial point is that we are in fact no better off simply that the official numbers reflect things better. There is an irony as they have done so just as things look to be turning down! But better late than never and there is one further important point which Simon French made. As a past bond trader let me point out that one of the reason’s UK bond yields rose relatively higher was our supposed economic under performance. That should now begin to unwind although remember the first human response to a big change is usually denial. Let me finish with another wry smile.

The revisions may also not have a big impact on public finances, since they do not alter official tax receipts or public spending data. ( Financial Times)

I guess the FT will not be using debt to GDP ratios any time soon which surely matter if you have been running stories about a fiscal “Black Hole”.

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UK GDP grows in July but has flatlined in 2022 so far

This morning has brought some positive news for the UK economy.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in July 2022.

Not much but this is a year where any growth us an achievement. It turns out that it was a services effort single-handed. So we are back to our long-standing theme of the UK rebalancing towards services which is exactly the opposite of what that phrase was supposed to be according to former Bank of England Governor Baron King of Lothbury.

The services sector grew by 0.4% in July 2022 and was the main driver to the rise in GDP. However, both production and construction fell in July 2022, by 0.3% and 0.8% respectively, and this was the second consecutive fall for both these sectors.

Services

As we look into the detail we see that this area had a very good month.

Information and communication grew by 1.5% in July 2022 and was the largest contributor to July’s growth in services . The main driver of this growth was computer programming, consultancy and related activities, which grew by 1.5% in the month and telecommunications, which grew by 1.9%.

So perhaps some high-tech areas are doing well and I have to confess I am wondering what is driving the telecommunications growth? Next up is an area which has not only proven volatile in the post pandemic era but is difficult to measure.

Human health and social work activities saw growth of 0.8% in July 2022, the main driver of this growth was human health activities, which grew by 1.1% in the month. There were increases in GP appointments and critical care in July 2022, offset by a fall in A&E attendances.

Another area which grew was one which perhaps needs it most of all.

Output in consumer-facing services grew by 0.6% in July 2022, following a flat month in June 2022.

Maybe the switch to more second-hand cars is boosting business here.

The largest positive contributor in consumer facing services was the wholesale and retail trade and repair of motor vehicles and motorcycles industry, which grew by 4.0% in July 2022.

Also the success of the England women’s team in the Euros helped.

The second largest driver in consumer facing services growth was sports activities and amusement and recreation activities, which saw growth of 8.1%, in a month that included the UK hosting both the Women’s EURO Championship and Commonwealth Games.

For the weaker areas we can start with another part of consumer facing services.

These growths were partially offset by a fall of 4.5% in other personal service activities, after continuous growth in this industry since November 2021.

But more intrigingly is this is sign of a turn in the housing market?

Also contributing negatively to growth in consumer-facing services was buying and selling, renting and operating of own or leased real estate, excluding imputed rent, which fell by 0.3% in July 2022.

We are not seeing it in other signals yet so perhaps this is the canary in the coalmine.

The biggest services faller had quite a bit going on.

The largest negative contributor to services in July 2022 was professional, scientific and technical activities, which fell by 0.8% in the month.

I am presuming that advertising took the hit here.

The largest drivers of this fall were advertising and market research (which fell by 5.2% in July 2022), architectural and engineering activities, and technical testing and analysis (which fell by 4.2% in July 2022).

Is this the energy industry trying to figure out how to avoid a windfall tax? Actually you can lump in the wind farms with that.

These falls were partially offset by a 5.2% rise in accounting, bookkeeping and auditing activities, and tax consultancy.

Production

It was not such a good month for this area with the hot and indeed dry weather in play.

Production output fell by 0.3% in July 2022, with electricity, gas, steam and air conditioning supply as the main driver of negative growth, falling by 3.4% on the month having previously increased by 3.1% in June.

There is an interesting section where they try to figure out how much was the weather and how much was the higher electricity prices?

According to anecdotal evidence from the Department for Business, Energy and Industrial Strategy (BEIS), demand for electricity was 2.3% lower than seen in July 2021 (that may have been influenced by the higher than usual temperatures). Anecdotal evidence suggests that there may be some signs of changes in consumer behaviour and lower demand in response to increased prices.

No-one will be surprised by this response to higher energy prices.

 Mining and quarrying grew by 3.5%, owing to 4.6% growth in extraction of crude petroleum and natural gas.

I think we should be pleased to see any growth in manufacturing at all.

Manufacturing increased by 0.1% in July 2022, with a mixed performance across the sub-sectors. There were growths of 3.3% in manufacture of machinery and equipment, 2.4% in manufacture of wood and paper products, and printing, and 1.3% in manufacture of transport equipment.

Especially as our swing factor was in reverse this time around.

These growths were largely offset by falls in other manufacturing, and repair and manufacture of basic pharmaceutical products and pharmaceutical preparations, which both fell by 2.3% on the month.

For newer readers this industry plainly does not work to a monthly schedule so there are plenty of ebbs and flows.

It has been a rough run for the motor industry but there is a little relief.

Within the manufacturing of transport equipment, the manufacture of vehicles, trailers, and semi-trailers industry has now seen five consecutive monthly increases, which might suggest supply shortages are beginning to ease.

There is potentially quite a bit going on here.

Water supply and sewerage decreased by 2.1% in July 2022, with sewerage (down 2.8%) and waste collection, treatment and disposal activities (down 3%), both contributing negatively to growth.

Maybe it was the drought but it is also true that after a period where there have been successes ( there is much more aquatic life in the Thames for example), more recently the news has been about sewage overflows. As so often what does the regulator do?

Construction

This should be relatively easy to measure but has long been troubled.

Construction output decreased by 0.8% in July 2022, after a 1.4% fall in June 2022. This follows seven consecutive months of growth in the sector between November 2021 and May 2022.

One thing that is clear is that inflation is raging.

As in previous months, high prices for certain construction products, most notably concrete, plaster, bricks, sand, gravel and asphalt-related products, continue to be an issue in the industry. The annual rate of all construction work price growth is 9.6% in June 2022, this is a record high since the Construction Output Price Indices series began in January 2014

Comment

Whilst I welcome a better month it is also true that my theme that inflation is bad for economies is in play in 2022.

Looking at the broader picture, GDP was flat in the three months to July compared with the previous three months.

Putting it another way if we look for a deeper perspective we see that growth in the UK economy stopped as we moved into 2022. Yes the monthly figure is up 0.7% on December last year but we are essentially ( strictly -0.1%) where we were in January.

Meanwhile going back to the detail I was not expecting this to reappear.

NHS Test and Trace and COVID-19 vaccination programme activity increased by 16% in July 2022, driven entirely by growth in Test and Trace volumes. Test and Trace volumes in June grew by 33% compared with June 2022. There were also increases in both lateral flow and polymerase chain reaction (PCR) testing, with lateral flow tests being the principal driver.

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UK GDP both pleases a little and contracts

This morning has brought us up to date on the second quarter for the UK economy and the figures were awaited even more than normal for two main reasons. The first is the cost of living crisis which has built as 2022 has progressed and the second is the impact of the Platinum Jubilee holiday and celebrations. So let us get straight to it.

UK gross domestic product (GDP) is estimated to have fallen by 0.1% in Quarter 2 (Apr to June) 2022, based on the first estimate.

Thus the first impact is that we have seen a decline albeit of the smallest possible amount. That is the contracting part of my title and the pleasing bit is that it was better than the official forecasts.

 Bank ( of England ) staff now expected GDP to have fallen by 0.2% in Q2 as a whole,

Every little helps right now.

Breaking It Down

Services

We see that this was a big player in the decline as we note this.

In output terms, services fell by 0.4% in Quarter 2 2022 with the largest negative contribution from human health and social work activities, reflecting a reduction in coronavirus (COVID-19) activities.

In it was a player we have become used to in the pandemic era where, Test & Trace, Vaccines and even GP appointments have been in play. Well, here we go again.

There was a 5.4% fall in human health and social work activities, reflecting a large reduction in coronavirus activities, such as NHS Test and Trace, COVID-19 vaccination< programme and lateral flow orders over the second quarter.

We looked at this for the May numbers which showed this from Test & Trace and vaccines.

The overall impact of these declines was to detract 0.2 percentage points from monthly GDP in May 2022.

We know can add that a further 0.1% was subtracted from monthly GDP in June. Putting it another way expenditure on the two areas fell from £340 million in May to £230 million in June.

We are not formally told the impact of this but the dataset shows a quarterly fall of just over £6.5 billion from these two sources. So an impact on the quarterly GDP numbers of the order of -1.2%. We do get an estimate of the impact of health and social work overall at -0.5% so rising GP appointments and the like gave us a bit more than half of it back.

In addition there was this.

There was a 1.0% fall in wholesale and retail trade.

So in addition to the struggling retail sales sector we have been following there was this.

The Business Insights and Conditions Survey (BICS) highlighted that around 32% of businesses within the wholesale and retail trade industry reported global supply chain disruptions at the end of the second quarter of 2022.

Switching to the positive side ( as we have way over accounted for the fall) there was this.

The fall in services output was partially offset by increases in output from accommodation and food services (4.7%), driven by increases in accommodation and in food and beverage service activities reflecting rises in mobile food stands and takeaway food shops.

Some of this was no doubt Platinum Jubilee related as it took away with one hand with the extra Bank Holiday and gave with the other as people stocked up for the celebrations. Plus there was something I had noted from time to time as the film and TV industry returned to Battersea Park.

There were also increases in other service activities (7.4%), and arts, entertainment and recreation (3.3%), which had previously been impacted by COVID-19 restrictions.

Actually they also closed Albert Bridge for a weekend for the film Our Man in Jersey.

I guess you will not be surprised to see the impact of people going on holiday.

Administrative and support service activities rose by 1.2% in Quarter 2 2022 driven by an increase in travel agencies, tour operators and other related activities,

Production

There is quite a bit of ying and yang here as any increase right now feels good although it did slow.

Production output rose by 0.5% in Quarter 2 2022, a slowdown compared with the previous quarter when it increased by 1.3%, while the level of production output remains 1.2% below pre-pandemic levels.

Actually flat manufacturing may not be so bad with rising costs.

Overall growth in manufacturing was broadly flat, however there were falls in 7 of the 13 manufacturing sub-sectors.

Also the “swing factor” which is pharmaceuticals was against us this time around.

The largest contributor to the fall in manufacturing was in manufacture of chemicals and chemical products; and manufacture of machinery and equipment.

The rises were interesting as I think it was later we switched to exporting power more often, but perhaps we were supplying LNG gas to Europe.

The quarterly rise in production output was driven by a rise in electricity, gas, steam and air conditioning supply (2.7%), resulting from growth in the manufacture of gas; and electric power generation, transmission and distribution.

As we were not heading for drought then in the way we are now this is harder to figure out. Although maybe it was the campaign to reduce the pumping of sewerage into rivers and the sea.

There were increases in water supply activities (2.9%), because of positive contributions from remediation activities and other waste management services; waste collection, treatment and disposal activities; and sewerage activities.

Finally even with our political class asleep this was still as surprise as you would think we would be producing to the max.

There was a 0.3% fall in mining and quarrying output in Quarter 2 (Apr to June) 2022, following a reduction in mining support service activities.

Construction

Regular readers will know that I have little faith in this numbers because of the way that they are revised both frequently and substantially.

Construction output rose by 2.3% in Quarter 2 2022, and is now 2.7% above pre-coronavirus pandemic levels. Increases in both new work and repair and maintenance contributed to the quarterly growth.

Comment

The details show what is quite a mixed up pattern. We are seeing such swings between different sectors in services that it is extremely likely that the weights used in the calculations are wrong. So the numbers are particularly unreliable at this time for that reason.

Also I have made the point regularly that there are considerable issues with the monthly series which has for the latest two months produced this.

Gross domestic product (GDP) fell by 0.6% in June 2022, after growth of 0.4% in May 2022 (revised down from 0.5%),

With a large factor being this.

The Platinum Jubilee, and the move of the May bank holiday, led to an additional working day in May 2022 and two fewer working days in June 2022.

Another factor that leads to more uncertainty is the way that the inflation measure called the deflator has swung around.

The implied GDP deflator rose by 1.1% in Quarter 2 2022, mainly driven by a 2.7% increase in the implied price of household consumption. Compared with the same quarter a year ago, the implied GDP deflator rose by 6.0%, primarily reflecting the 7.3% increase in the price of household consumption expenditure, which is the fastest annual household rate since 1991.

Regular readers may recall my post of the 12th of August 2020 when I pointed out that “our widest measure of inflation” or the deflator was at 6.2% when we were otherwise told there was no inflation.

If we now switch to perspective we have this.

 The level of quarterly GDP in Quarter 2 2022 is now 0.6% above its pre-coronavirus level (Quarter 4 (Oct to Dec) 2019), and 2.9% higher than Quarter 2 2021.

So the economy is bigger than before but we are now experiencing the stagflation we have both feared and expected pretty much all this year.

In terms of international perspective I have done some rough numbers for the first half of this year.

Germany 0.8%

UK 0.7%

France 0.3%

US -0.7%

Finally let me show you the number which is a bulwark against this becoming a debt crisis.

Nominal GDP increased by 1.1% in Quarter 2 2022 and is 9.1% higher than the same quarter a year ago. It is now 10.5% above its pre-coronavirus pandemic levels.

This applies to the around 78% of our debt which is on fixed interest-rates or what are called conventionals. Basically there are more pounds around to pay them with so that part of the debt metric improves. Just to be clear that is in isolation and does not include falling real wages or other cost of living issues.

 

 

UK GDP growth put in a strong performance in May

During a difficult economic year with its cost of living crisis driven by higher energy costs it is nice to get some good news. The UK has produced that this morning.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.5% in May 2022  following a fall of 0.2% in April 2022 (revised up from a 0.3% fall).

So in net terms we have a 0.6% improvement which means in terms of our overall position we stand here.

Monthly GDP is now estimated to be 1.7% above its pre-coronavirus (COVID-19) pandemic levels (February 2020).

If we jumped into the Tardis of Dr.Who and went back in time we would consider the growth performance to be not much but of course a lot has happened in the past couple of years or so and relatively we are doing okay.In terms of analysis I did point this out last time.

The NHS Test and Trace and COVID-19 vaccination programme detracted 0.5 percentage points from GDP growth in April 2022.

So after that impact there was some growth ( strictly 0.2% and 0.3% after today’s revision) so the claim in many places that this is “unexpected” is not quite true. The size of the growth perhaps but not that there was some.

Breaking it down

As so often it was services which were the main player.

Services grew by 0.4% in May 2022 and was the largest contributor to GDP growth. This follows a fall of 0.2% in April 2022 (revised up from a 0.3% fall).

There were also consequences following on from the pandemic and the UK way of measuring health output.

Human health and social work activities increased by 2.1% in May 2022 and was the main contributor to May’s growth in services (Figure 3) despite the substantial reduction in NHS Test and Trace and vaccination activity. This growth was driven by human health activities, which increased by 2.5% following a fall of 7.6% in April 2022. Growth in human health activities in May 2022 was mainly driven by a large rise (15%) in GP appointments in England.

The issue with General Practioner appointments is a polarising one as the service people get seems to be either good or awful. Covid numbers are back in the news because they have been rising again but in economic terms their influence on economic output has been declining steadily.

NHS Test and Trace and COVID-19 vaccination programme activity decreased by 44% in May 2022, driven by falls in both test and trace and vaccine activity. NHS Test and Trace volumes fell by 47% in May, compared with April, and came from strong falls in lateral flow devices and lab-based testing. Vaccine volumes fell by 42%, as the spring booster programme for at-risk groups began to reduce.

Putting it another way they did this.

The overall impact of these declines was to detract 0.2 percentage points from monthly GDP in May 2022.

So a relative 0.3% difference in GDP impact compared to April.

Having looked at the strongest area it was no great surprise that the weakest was one exposed to the cost of living crisis.

The largest negative contribution to services in May 2022 was wholesale and retail trade; repair of motor vehicles and motorcycles, falling by 0.8%. The main driver of negative growth in this sub-sector was wholesale trade, except of motor vehicles and motorcycles, which fell by 1.5%.

Another facet of that can be seen here.

Output in consumer-facing services fell by 0.1% in May 2022, following downwardly revised growth of 2.2% in April.

This area was severely affected by the Covid pandemic and has suffered from an economic depression which show little or no sign of easing.

Consumer-facing services was 4.7% below its pre-coronavirus (COVID-19) levels (February 2020) in May 2022, while all other services was 3.6% above

Maybe people are going out less as well.

The monthly fall in consumer-facing services was driven by a contraction of 5.3% in sports activities and amusement and recreation activities, however, it is important to note there is lower data content at this stage for these “areas”

On the other side people are taking the opportunity to go away on holiday which is confirmed by the airport chaos we have seen all over Europe.

This was partially offset by growth in travel agency, tour operator and other reservation services and related activities, the largest positive contributor in consumer-facing services, which increased by 11.0%.

Production

If there was a clear surprise in the numbers it was how well manufacturing performed.

Production output rose by 0.9% in May 2022, driven by growth of 1.4% in manufacturing; there was also an 0.3% increase in electricity, gas, steam and air conditioning supply.

Manufacturing increased by 1.4% in May 2022, with growth increasing in 12 of the 13 manufacturing sub-sectors.

In terms of detail unfortunately we run into the other category!

The largest contribution to growth was in other manufacturing and repair (up 3.4%), which saw positive growth in all five industries. This follows a fall of 4.0% in April 2022.

It seems to be running on a different timetable to the monthly count which is something we have long observed for pharmaceuticals.

Growth was also seen in May 2022 in manufacture of basic pharmaceutical products and pharmaceutical preparations (3.2%) manufacture of food products, beverages and tobacco (1.1%) and manufacture of electrical equipment (3.9%).

The one category to fall was metals which I would assume is due to the rise in energy costs making much production in this area uneconomic.

As we need all the mining output this is not entirely reassuring as we hope it is due to maintenance.

Mining and quarrying fell by 2.7%, driven by a 4.1% fall in the extraction of crude petroleum and natural gas.

Staying with the energy sector I wonder if this is picking up our new role as a type of LNG middle(wo)man.

Construction

Regular readers will know that even the quarterly numbers are  unreliable for this area posing real questions for monthly ones. But for completeness, here they are.

Construction output increased by 1.5% in May 2022 (Figure 8) and is now at its highest level (£15,053 million) since monthly records began in 2010. Following upwardly revised April 2022 growth of 0.3%, this is the seventh consecutive rise in monthly growth.

Comment

So as it happens the UK economy fits with the hot weather in being sunny. But also like the UK weather it is not likely to last. My view that it is likely to be a year of not much growth remains. There will be not so good months due to the cost of living crisis as well as better ones like May. Indeed one is due up next because if nothing else June will have a downwards impact from the long Jubilee bank holiday.

The good news does pose a problem for 9 people however. This was highlighted by Bank of England Governor Andrew Bailey only last night.

BoE’s Bailey: Options Other Than 25bp Rate Hikes Are On The Table ( @LiveSquawk)

An interesting thing to say ahead of numbers which have had this impact.

“Folding in both the back revisions and the surprising jump in activity in May boosts our estimate of Q2 GDP growth from -0.7% to +0.3%” (!!!!) – GS ( @CNBCJou)

Also he promised to get on yop of inflation.

BoE’s Bailey: BoE To Act Forcefully If We See Evidence Of Inflation Persistence

The problem of course is that he has been yet another version of the unreliable boyfriend.

 

 

UK GDP is revised higher but so is inflation

Today has brought some good news for the UK economy but with the kicker that inflation is on the march as well. So let us start with the good news on the economy.

UK gross domestic product (GDP) is estimated to have increased by 1.3% in Quarter 4 (Oct to Dec) 2021, upwardly revised from the first quarterly estimate of a 1.0% increase.

This means that we had pretty much got right back where we started from at the end of 2021.

The level of GDP is now 0.1% below where it was pre-coronavirus (COVID-19) at Quarter 4 2019, revised from the previous estimate of 0.4% below.

Of course there is the issue that such a performance rather leaves us singing along with David Byrne and Talking Heads.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

So the news is welcome but we are now facing more problems which takes us back to the fact that the economic outlook was not so great back at the end of 2019. We do not know what the state of play would have been without the Covid pandemic but we do know that many economies were struggling before it occurred.

In the detail we saw that the issue of debt is not as big a deal as it might be because of this.

Nominal GDP rose by 3.0% in Quarter 4 2021, revised upwards from 1.5%. It is now a revised 5.9% above its Quarter 4 2019 levels.

Around three-quarters of our debt is conventional and nominal so there is plenty of money around for government to pay interest on it.There is the inflation-linked part which is more of an issue and we can switch to that sort of theme by looking at why we had an upwards revision.

Health Output

This was the major player in the change and is an issue I keep signalling.

The rise in government spending in the latest quarter was driven by an increase in health spending of 4.6%, reflecting a rise in the NHS Test and Trace and COVID-19 vaccination programmes, including the booster programme.

You might reasonable think that in an era of incredible IT progress they would know these numbers in short order, but apparently not. For our purposes today we can also look at education.

Education consumption fell by a revised 1.5% in Quarter 4 2021 and is 5.9% below its pre-coronavirus level. The fall in the latest quarter reflects a decrease in student attendance towards the end of Quarter 4.

Okay so they did not know how many students there were? But adding it all up gives quite a change.

In current price terms, government consumption was revised downwards in 2021 to 7.0%. This was partly driven by downward revision to health expenditure. There were also downward revisions to current price expenditure on public administration and defence in 2021.

The Implied Deflator

We have seen the impact that trying to measure health and education output via the theoretically correct but in practice difficult and complicated GDP output series has had before. Regular readers will recall the early pandemic impact of a 33% move in these sectors moving the overall deflator by 6%. This matters because we are assured that this is true.

This deflator represents the broadest measure of inflation in the domestic economy, reflecting changes in the price of all goods and services that comprise GDP.

I am questioning this more and more because whilst this may be true.

The implied GDP deflator rose by 1.7% in Quarter 4 2021 (compared with Quarter 3 (July to Sept) 2021), upwardly revised from a first quarterly estimate of 0.6%

So they are noting the pick-up in inflation that was happening it required a revision to do it and the annual figure frankly just looks hard to believe.

Compared with the same quarter a year ago, the implied GDP deflator rose by 1.7%, revised from 0.8%

The issue gets worse as we advance wondering what health and education have done this time? Only to see this.

The quarterly change primarily reflected a revised increase in the implied price of household consumption……. ( and annually) This was mainly driven by the 4.4% increase in the implied price of household consumption.

So this revision has picked up some inflation but we are seeing large swings as they struggle to cope with a changing world.

Spending on household goods and services is 12.7% higher, while transport spending is 15.6% below its pre-coronavirus levels. Household spending on restaurants and hotels has now recovered to above its pre-coronavirus level.

House Prices

Next in our inflation saga comes this from the Nationwide.

“March saw a further acceleration in annual house price growth to 14.3%, the strongest pace of increase since November 2004. Prices rose by 1.1% month-on-month, after taking account of seasonal effects, the eighth consecutive monthly increase.

“The price of a typical UK home climbed to a new record high of £265,312, with prices increasing by over £33,000 in the past year. Prices are now 21% higher than before the pandemic struck in early 2020.

This is very wrong as the miss measurement of inflation has allowed the Bank of England to have a free pass at pumping up house prices and then claiming it has made people better off. This ignores the fact that first-time buyers and those trading up have to pay higher prices and thus face inflation and indeed lots of it. Furthermore some benefit from the bank of mum and dad but others do not so the Bank of England has added to inequality which is also a familiar theme in its behaviour.

As to looking ahead it is amazing really.

The housing market has retained a surprising amount of momentum given the mounting pressure on household budgets and the steady rise in borrowing costs.

It should not be true but somehow it is an even the Nationwide finds it necessary to invent some form of wages fairy.

The continued buoyancy of housing demand may in part be explained by strong labour market conditions. The unemployment rate has continued to trend down in recent months (to 3.9% in the three months to January) from already low levels. Wage growth has accelerated, though it is running below inflation.

Comment

There was also good news for the UK from the trade figures today as we saw some considerable upwards revisions.

Total export volumes rose by a revised 6.9% in Quarter 4 2021, from a first quarterly estimate of 4.9%. The increase was driven by a 9.6% increase in the exports of goods, particularly in unspecified goods, fuels, and chemicals. Service exports increased by 4.0% in Quarter 4 2021, revised from a fall of 1.8%. This quarterly increase reflected a rise in other business services, telecommunications, and intellectual property.

This will have various part of social media looking the other way as they have spent some time saying how bad the numbers are combined with all sorts of new analysis. Also for newer readers unlike what you are told at school and university trade is not explicitly in the GDP release ( it is in the expenditure version).

As some call us a “hairdresser’s economy” these days it was hard not to smile at this.

Other service activities, which includes personal services such as hairdressers, saw a marked upward revision.

Now I would like to pivot back to inflation and the Bank of England and address what was a whinge dressed up as a speech by the absent-minded professor Ben Broadbent yesterday.

Such criticisms, whether justified or not, are par for the course, and may not be that consequential in the grand scheme of things.

Inflation is around treble its target and house prices are flying but Ben seems to think criticism is unfair. Some of this he has harboured for a long time.

But there’s no doubt it happens. In September 2013, the MPC said that a minimum necessary condition for a rise in interest rates was that unemployment should fall below 7%

My first response is thanks for telling us all these years later! But let me give you an example of a clear technical failure which was using the unemployment rate in the first place. Next I am afraid to say is a lie as Governor Carney knew what he was doing.

Similarly, in a speech in July 2015^footnote[5], the then-Governor Mark Carney said the “the decision as to when to [start raising interest rates] will likely come into sharper relief around the turn of the year”. This was no more than suggestive…..

This is very much Lilly Allen style ( It’s not me it’s you…). But it gets worse because if he believes the statement below why has he spent the last 9 years or so supporting Forward Guidance on interest-rates?

And because it’s the job of monetary policy to respond to such things, interest rates are also unpredictable.

The impact of Vaccine Boosters and Covid testing return UK GDP to pre pandemic levels

This morning has brought some good news for the UK economy especially in the circumstances. As I shall explain later the way 2022 is heading it looks like we are going to need it. But let us start with what was in economics terms a sort of ta da moment.

Gross domestic product (GDP) fell by 0.2% in December 2021 to equal its pre-coronavirus (COVID-19) pandemic level (February 2020);

Or at least so we thought as that was the level of monthly growth which all things being equal would have meant the quarter as a whole was back to pre-pandemic levels. As it turned out some downwards revisions meant it was only December that did that. The shifting sands of economic measurement changed the background.

Monthly real gross domestic product (GDP) is estimated to have fallen by 0.2% in December 2021, compared with a 0.7% growth in November 2021 (revised down from 0.9% growth).

In terms of the breakdown we were fearing for hospitality and hence services as a whole and this is how it turned out.

Accommodation and food service activities was the second largest contributor to December’s fall in services, down by 9.2%. Both accommodation and food and beverage service activities fell in December, by 11.5% and 8.1% respectively, with businesses reporting impacts from the Omicron variant.

Whilst that area had the largest decline the bigger retail sector ended up having a larger overall impact.

Wholesale and retail trade fell by 3.2% in December 2021 and was the main contributor to December’s fall in services . The main driver of this fall was retail trade, which contracted by 3.7%. The Omicron variant of coronavirus was reported by some retailers as affecting retail footfall.

Bringing them together we got this.

Output in consumer-facing services fell by 3.0% in December 2021,

Putting that another way this area has seen an economic depression which is ongoing.

Consumer-facing services were 8.4% below their pre-coronavirus levels (February 2020) in December 2021, while all other services were 2.8% above.

This is an issue which the high street has been suffering from for some time. Also so has some of the hospitality industry and I am thinking of pubs here.

Pubs suffered a loss of £5.7 billion from beer sales alone last year, the equivalent of 1.4 billion fewer pints sold, according to the organisation.

I know that some of it represents a switch in favour of wine and other drinks but the sector has been under pressure for some time.

Against all of this was again a move we were expecting.

The NHS Test and Trace and COVID-19 vaccination programme had a positive 0.7 percentage point impact on gross domestic product (GDP) in December 2021, with output of these services increasing by 51% and 19% respectively.

Or if you prefer they provided a £1.1 billion monthly boost to UK GDP.

Bringing it all together we ended up with this.

Services output fell by 0.5% in December 2021 but remained 0.5% above its pre-coronavirus (COVID-19) pandemic level (February 2020).

So a rough month but overall we have returned to the normal UK situation of services being the leader of the pack.

Production

There was better news from this sector although the growth seems to have been shifted from the November numbers.

Production output increased by 0.3% in December 2021, with growth in three out of the four sub-sectors. This follows growth of 0.7% in November 2021 (revised down from 1.0%).

Regular readers will be aware of the way that whilst overall the pharmaceutical sector is a UK strength but in practice swings in and out of the numbers as its pattern does not fit monthly recording.

Manufacturing grew by 0.2% in December 2021, with the manufacture of basic pharmaceutical products and pharmaceutical preparations (up 12.0%) and the manufacture of transport equipment (up 3.1%) the main drivers of this growth.

As a technical issue with all the price rises it will be very hard to measure gas right now in real terms.

Electricity, gas, steam and air conditioning supply increased by 1.6% in December 2021, with distribution of gas increasing by 5.6%.

This next bit makes me want to bang my head against the wall as we decide to restrict new gas fields in an energy crisis.

Mining and quarrying was the only sector to fall in December 2021, with a contraction of 3.1% driven by a 2.7% fall in extraction of crude petroleum and natural gas.

Construction

This presumably has benefited from what has been so far a relatively mild winter.

Construction output increased 2.0% in December 2021 following an increase of 1.9% in November 2021 (revised from a 3.5% growth).

Which meant it finally broke new ground.

Construction output was above its pre-coronavirus (COVID-19) pandemic level (February 2020) for the first time, by 0.3%

Although there is a reminder of my theme that the numbers for this sector are open to doubt.

with the largest revisions seen in September and November 2021 (down 1.4 and 1.6 percentage points respectively)

What about the fourth quarter?

In relative terms this too was good.

UK gross domestic product (GDP) is estimated to have increased by 1.0% in Quarter 4 (Oct to Dec) 2021, following a downwardly revised 1.0% increase in Quarter 3 (July to Sept).

We were not affected too much by the Omicron scare in December although care is needed because we only maintained the same quarterly growth rate due to a downwards revision.

revisions to 2021 data – in line with the National Accounts Revisions Policy – saw Quarter 4 2021 remain below its pre-coronavirus level……..The level of quarterly GDP in Quarter 4 2021 is now 0.4% below its pre-coronavirus level (Quarter 4 2019).

The year just gone was a strong one economically.

UK gross domestic product (GDP) is estimated to have increased by 1.0% in Quarter 4 (Oct to Dec) 2021 (Figure 1). Compared with the same quarter a year ago, GDP increased by 6.5%.

Following the large 9.4% fall in 2020 because of the initial impact of the coronavirus (COVID-19) pandemic and public health restrictions, UK GDP saw an annual rise of 7.5% in 2021.

Trade

There was a boost from this area.

Total export volumes rose by 4.9% in Quarter 4 2021, driven by an 11.2% increase in the exports of goods, specifically fuels, chemicals, and machinery and transport equipment.

The good export news was accompanied by a fall in imports.

Total import volumes fell by 1.5% in Quarter 4 2021. The fall in services imports by 3% was driven by falls in telecommunications, financial services, and manufacturing and maintenance. The fall in import goods by 1% was driven by unspecified goods, machinery and transport equipment, and crude materials.

Comment

Overall this is a decent set of numbers and it does get a boost from something which is the opposite of the line the MSM have pursued on trade with the European Union. Let me give Thomas Sampson of the LSE credit for looking at the actual numbers.

But – and this is surprising – effect of TCA very different for exports vs imports Exports. EU exports bounced back strongly after big fall in January. Data for second half of 2021 suggests TCA has not reduced EU exports relative to non-EU exports (at least so far)

So after a jolt UK exports have recovered but we are importing much less from the EU.

Imports. EU imports fell around 30% relative to non-EU imports in 2021. This gap is not only large, but has been growing over time.

Care is needed as more recently the rise in energy imports will be there but the move was happening before that.

Back to my point that 2022 will be a lot tougher. Much of this is around the cost of living crisis as we see inflation impact on the economy. That will drain real incomes and consumption. Yesterday gave is another feature of that as the falls in the bond market suggested another 0.25% on interest-rates in the US. So there will be a squeeze from things such as mortgage rates and that is already in play with my leading indicator for it the UK 5-year yield at 1.44% this morning. We have not seen a squeeze like this for a while.